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Fintech: OSC grants first licence to online lender

CANADA'S FINTECH SECTOR HAS TAKEN a giant step forward with the Ontario Securities Commission’s decision to make Vault Circle Inc. Canada’s first digital lending platform to receive an exempt market dealer license.

The approval, granted on September 28, finally puts Canada in company with the United States and the United Kingdom.

“These types of platforms have been around for over 10 years in the United Kingdom and the United States and are projected to be a trillion dollar industry by 2020,” says Marcel Schroder, Managing Director and Chief Compliance Officer at Vault Circle. “But Canada’s regulators chose not to jump in as quickly as some other countries, preferring to see what would happen elsewhere before doing so.”

In June 2015, the OSC expressed its concern that digital platforms, perhaps more commonly known as “peer to peer” lending websites, could trigger the dealer registration and prospectus requirements under Ontario’s Securities Act. A regulatory review followed, resulting in at least one business, Lending Loop, voluntarily suspending the posting of new loan requests in March 2016 after it engaged in talks with the OSC.

In July 2016, the OSC did provide further guidance for applicants. But there is still no regulatory framework in Canada for issuers or sponsors seeking to establish online lending platforms.

“Some may say that Canada is late to the game, and that may be true,” says Geoff Cher of Wildeboer Dellelce LLP in Toronto, who represented Vault Circle on the OSC application.

Cher and his clients first approached the OSC about a year ago. It wasn’t easy slogging. At least one previous applicant had given up after the OSC presented it with a 50-page list of requirements.

“It was like trying to squeeze a round peg into a square hole, because many regulatory types were still struggling with the idea of a digital platform that interacts with investors at large,” Cher says. “Some people still think that lenders should get to know their clients by playing squash with them every Friday morning — but for the most part, we’re over that hump.”

Still, the OSC moved cautiously, allowing Vault Circle to offer investor notes online only to accredited investors resident in Ontario, and requiring the company to notify the Commission when it acts on its intended goal of expanding across Canada.

“There’s no fast track,” Schroder says. “We’re starting with baby steps with the goal of educating the public and building trust with them.”

Vault Circle is also looking forward to emerging competition: “We’re hoping that, as other people do similar things, digital platforms will become known and be seen as attractive options for investment,” Schroder says.

Vault Circle is a subsidiary of Lendified Holdings Inc. and its direct lender, Lendified Inc. Lendified recently announced that it had secured $24 million in funding and credit facilities for its online small business activities. The excellent track record and experience of the company’s executives, each of whom have at least 20 years’ service with a major financial institution, were instrumental in the approval of the exempt market dealer license.

But so, likely, was the use to which investors’ funds will be put. Lendified will use the proceeds raised by Vault Circle from accredited investors to provide alternative financial options to small and medium-size businesses in Canada that qualify for loans up to $150,000.

“There’s no question that the OSC and the Ministry of Finance want small business to have more access to capital,” Cher says. “And the approval of our application demonstrates that there is in fact a regulatory appetite for taking innovative platforms seriously.”

On the other hand, Cher recognizes that investor protection will always remain in play.

“As regulators see it, the online portal dilutes a lender’s ability to check the boxes on things like background checks and know-your-client,” Cher says. “So the trick is to see how closely an online portal can come to conforming with regulatory rules that were not designed with the Internet in mind.”